Pension funding withers

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Pension funding withers

By Rich Rovito

The Business Journal, May 9, 2003

Harley-Davidson Inc. pumped more than $150 million into its employee pension plan in 2002 to offset nearly three years of dismal stock market performance that had shrunk the plan's assets.

Harley is hardly alone. Nearly every publicly traded company based in the Milwaukee area that has a pension plan has seen the funds continue to wither in a weak investment market.

For example, Milwaukee-based Rockwell Automation's pension plan went from being underfunded by $91 million at the end of 2001 to being underfunded by an additional $281 million, or a total of $372 million, at the end of 2002, according to filings with the U.S. Securities & Exchange Commission. Just two years ago during the stock market peak, Rockwell's plan was overfunded by $210 million.

Pension fund concerns caused Standard & Poor's to downgrade Rockwell's outlook from "stable" to "negative." Standard & Poor's said the change resulted from "increased concerns about exposure to unfunded post-retirement benefit liabilities."

Rockwell then announced it would voluntarily shift as much as $50 million to the pension plan by June 15.

The pension plan funding status deteriorated for 18 of the 19 Milwaukee area companies reviewed by The Business Journal. For 2002, the companies' pension plans were underfunded by a total of $1.8 billion, compared with underfunding of $472 million in 2001, an increase of 281 percent, or $1.3 billion.

Although most companies can afford increasing their contributions to defined benefit plans in the short run, the sluggish economy and corresponding stock market slide could lead to a reduction in future benefits paid out to employees, said Cheryl Maranto, associate dean of Marquette University's School of Business.

"During the stock market boom, everyone was overfunded," Maranto said.

Companies have been forced to contribute to their pension plans at a time when sales and earnings have been hard hit by the weak economy.

Federal regulations require that when a pension plan, or defined benefit plan, is underfunded by 15 percent or more, the employer must contribute to the fund to bring it back to more than 85 percent in funding.

Worries for retirees

The funding issue has worried retirees as well as current employees of companies with defined benefit (pension) plans, said John Goldstein, president of the Milwaukee County Labor Council.

"This is money people have worked for to guarantee their retirements," he said.

In the case of union contracts, employees often have agreed to certain concessions in order to preserve pension benefits, Goldstein said.

During the 1990s, when investment returns were high, plans became a source of capital for companies. Plans were depleted even further over the past few years as returns on investments dwindled, Goldstein said.

Employers that don't bring their pension plans to full-funding status can be required to pay higher premiums to the Pension Benefit Guaranty Corp., a federal agency that oversees and insures pensions.

The pension agency can take over a fund if a company allows it to decrease to a level that the agency believes will result in employees not receiving their agreed-upon payout.

This scenario rarely results in employees receiving their full pensions, Goldstein said.

"You get 50 cents on a dollar if you are lucky," he said. "I liken it to the savings and loan crisis."

The stock market boom of the 1990s created unrealistic long-term expectations for pension plans, said Dennis O'Connell, an Employee Retirement Income Security Act (ERISA) specialist at Strong Financial Corp., Menomonee Falls.

"Many companies were using projected rates of return of 10 to 12 percent, which was a reasonable expectation in the 1990s," O'Connell said. "That hasn't been reasonable over the past few years."

Companies also got used to not having to make annual contributions to their pension plans as assets grew with the stock market, he said. Now, when money is tight, companies must come up with additional funds to offset the investment losses, a situation that is paradoxical, said Joan Gucciardi, president of Gucciardi Benefit Resource Inc., Wauwatosa.

"When companies can least afford it, they have to put more money into their plans than they normally would," she said.

The Harley plan

Harley-Davidson made a $100 million contribution to its pension plan in the fourth quarter alone. Even with the added money, the pension plan remained underfunded by $157.7 million. The plan was underfunded by about $160.6 million in 2002.

"We were on a schedule where we contributed at the low end of the range year after year, and we were just fine," said James Brostowitz, Harley-Davidson's treasurer and controller.

The company contributed $12 million and $19 million to the plan in 2000 and 2001, respectively. Contributions jumped to $153 million in 2002.

Harley-Davidson had been used to getting "nice, big fat returns" on its pension plan investments, which hasn't been the case since the economy went sour, Brostowitz said.

Renegotiated union contracts also have increased the company's pension obligations, he said.

The funding status of corporate pension plans can change in a relatively short period of time.

Racine-based Modine Manufacturing Co.'s pension plan was overfunded by $43.6 million in fiscal 2001 and remained overfunded by $28.8 million for fiscal 2002, which ended March 31, 2002. The plan's assets have continued to shrink due to the weak investment market, said Dave Spiewak, Modine's treasurer.

Spiewak declined to provide updated figures on its pension plan, but he indicated the plan no longer is overfunded.

"We just had a larger overfunding in previous years, so it took us longer to get hurt," Spiewak said.

A more dramatic example is Milwaukee-based A.O. Smith Corp., where the pension plan was overfunded by $53.8 million in 2001 but fell to being underfunded by $111.2 million in 2002.

The problem isn't limited to publicly traded companies.

Journal Communications Inc., which is held primarily by an employee stock ownership trust, said its pension plan remained underfunded in 2002, but at a lesser amount, $21.6 million, than in 2001, when the plan was underfunded by $38.6 million. However, the company reduced the underfunding by making a $44.4 million contribution to the plan in 2002.